$2 trillion cost to de-carbonise the world is actually a bargain

We can avoid the worst effects of climate change, say a team of Imperial College energy engineers in a recent study, and it will only cost US$2 trillion a year, at most. This sounds an unfeasibly large…

Author

Senior Departmental Fellow, Cambridge Centre for Climate Change Mitigation Research (4CMR) at University of Cambridge

Disclosure Statement

Terry Barker has received funding from the UK Research Councils and the Three Guineas Trust, one of the Sainsbury Family Trusts, to engage in research on climate change mitigation. He is Chairman and Consultant for Cambridge Econometrics.

We can avoid the worst effects of climate change, say a team of Imperial College energy engineers in a recent study, and it will only cost US$2 trillion a year, at most. This sounds an unfeasibly large sum of money but in fact amounts to around 1% of projected world GDP in 2050.

The study is clear on its assumptions, well-researched and balanced, and a useful update on earlier studies of a least-cost engineered solution to the problem. But it does not include the effects of how the wider economy would respond to the transformation of the energy system. GDP could be higher or lower, for example, depending on the economic policies required to bring about the change.

Man-made global warming is happening, climate scientists have warned again in the latest, fifth IPCC report released a few days ago. Since the previous report in 2007, levels of confidence have risen to 95% following greatly expanded lines of evidence that confirm earlier predictions. As is well understood, the problem is several centuries-worth of man-made greenhouse gases in the atmosphere. This is already higher than at any time over the last 800,000 years.

If we do not slow and ultimately stop adding to this build up of emissions then the potential for further damage rises. The Imperial College study argues that halving CO2 by 2050 will be enough to bring the prospective eventual rise of global temperatures to below 2°C. After 2050, this reduction must continue in order to maintain stable temperatures.

Creating value from decarbonisation

Drawing upon the International Energy Agency’s 2010 report on the prospects for energy technologies, the researchers have trawled the literature for costs of low-carbon equipment and vehicles. The study assumes projected demands for the services we want – comfort, mobility, light, power – analyses them by sector (buildings, transport and industry), and includes a detailed discussion of power generation and bioenergy. It provides details of comprehensive investments in each sector with costs and effects on energy use and emissions for 10 world regions. It’s apparent how the mix of technologies varies according to regional resources and political priorities.

Using data on energy supplies and demands from 2010, a future reference scenario is constructed for 2050, assuming that CO2 emissions are halved by 2050. Around 1% of GDP for 2050 is assumed as a net cost, while the cost of new low carbon equipment is offset by the costs of the fossil-fuel-using alternatives that are no longer needed. Generally, the study’s range of cost estimates are not unduly optimistic.

So the direct cost of 1% is modest in comparison to its benefits. As an insurance policy against the potential disaster of extreme climate change and the burdens of air pollution from fossil fuels puts on health, it seems cheap. Plus, the investment in low-carbon buildings, equipment and vehicles may well bring indirect economic benefits - higher incomes and new technologies that increase GDP and employment.

While this study confirms others in pointing out what must be done - decarbonising the economy - it does not explain how it could be done, nor when. There may be a feasible solution for 2050, but we need an idea of the feasible pathways that will get us there.

Finding the tools to get us there

The carbon price the study finds as necessary varies between US$30 and US$39 per tonne of CO2 by 2050, depending on the assumed price of fossil fuels. This price is calculated by the increase in costs from 1 extra tonne of reducing CO2 emissions across the board at the point where the target of halving emissions by 2050 is achieved at minimal cost.

But this price is low compared to the carbon prices beyond US$100 from studies for similar targets using models that incorporate economic responses. Either carbon prices must be much higher, or lower carbon prices need to be combined with other incentives and tighter regulations.

This engineering approach probably overestimates the effects of changes in relative prices, given how long it is taking to transform energy generation systems. And imposing carbon taxes or emissions trading schemes come with their own political or practical difficulties.

The policies required for the ideal engineering solutions have to be articulated more fully to inform governments how they should proceed. The team’s carbon price affects the prices of carbon-based fuels, yet there is no institutional detail. Implicitly there is a need to strengthen regulations and standards to reduce emissions from equipment and vehicles.

Looking at a wider picture, if the transformation of the energy system were a component of a green growth policy, the engineering “costs” can be seen as investments in new technologies creating new industries and jobs. Indeed such a technological revolution could lead to higher growth in the long term.